Esports uncovered – Part 2: the key stakeholders - a comparison with the football industry

This article aims to demystify the esports ecosystem, its structure and landscape, as well as map out some of the present and future trends, and risk factors associated with it.

The article is split into three parts:

Part 1 (available here[1]) – looks at the current esports ecosystem, including: facts, figures and forecasts for the sector; what has fuelled the recent expansion;and who the key stakeholders are.

Part 2 (below) – gives a snapshot into the key participants in the sector and compares them to those in the football industry.

Part 3 (available here) – looks at the biggest risks currently facing esports, and again offers a comparison to the football industry.

The key participants in the Esports ecosystem

Publishers

There are a range of publishers that are particularly active in the esports space. The publishers develop, design and market the games, or will otherwise work with (and/or acquire rights from) games’ developers to put a game “on the shelves”. They include Riot (League of Legends), Valve (Dota 2 and CS:GO), Blizzard (Call of Duty, StarCraft, Hearthstone and Overwatch ) and Hi-Rez (Smite).

Some publishers, like Riot, retain tight control over esports leagues which use their game titles and have created a standalone esports business and profit centre, organising events and commercialising rights, and regulating competitions in a manner not entirely dissimilar to a football rights holder, such as Union of European Football Associations (UEFA) who run the Champions League; however, most publishers do not operate large-scale esports leagues for their own games. Instead, it is often the case that the publisher will licence, a third party to organise the league or competition. Indeed, some take an almost entirely “hands off” approach, allowing third parties such as ESL and FACEIT to create and exploit these major events.

Although publishers take different approaches, it is fair to conclude that esports is, increasingly, an important part of their business models. But why is this the case? To answer this question, we need to “get under the skin” of the publisher’s underlying objectives:

“putting the game in the public eye”. Esports tournaments are often heavily promoted, high-profile events attracting significant audiences, in person and online esports therefore represents a key “route to market”: amateur players, who consume tournament content, on digital streaming platforms such as Twitch become fans and consumers of the game title itself; and,

on the same theme, esports is a franchise builder: a strong esports following can help the game remain relevant, keep its shelf life, and keep fans engaged. League of Legends is a good example of this principle. League of Legends was released in 2009. By July 2012, it was the most played PC game in North America and Europe in terms of the number of hours played. By January 2014, over 67 million people played League of Legends per month, 27 million per day, and over 7.5 million concurrently during peak hours. By September 2016 Riot estimated that there were over 100 million active players each month.[2] There is no doubt that esports has played a key role in the game’s extraordinary rise in popularity. Furthermore, many successful esports games are sequels or part of a wider franchise effort (although there is a balance here, because to be a truly sustainable esports game title, the game play and game mode should not alter too much, year on year, just as is the case with a traditional sport, such as football[3]). A recent example an esports title being altered occurred in December 2016 when Valve released its 7.00 patch. This update to the game changed many of the key mechanics within the game, meaning players that had spent hundreds (or maybe even thousands) of hours learning and understanding the game, needed to retrain. It was a controversial change that upset many of the games player base[4].

Events, Leagues and Competitions

There is no overarching global governing body, like football’s FIFA or UEFA.[5] However, that does not mean that there is not a form of “top down” regulation. The likes of Major League Gaming (MLG), ESL and the Esports Championship Series run competitions across particular games in various jurisdictions and, to a greater or lesser degree, regulate those competitions. Riot, for example, and as set out above, retains “top down” control over League of Legends competitions, requiring European and North American Teams to Register to a participation agreement and central regulations[6]. FACEIT, which operates the Esports Championship Series, has also developed a sophisticated regulatory structure to govern the league and the teams and players that compete.

A recent attempt to introduce standardisation into esports tournaments also came in the form of The World Esports Association (WESA) founded in May 2016, consisting of a committee comprising several top CS:GO teams and ESL. WESA’s stated aim was to improve player representation, tournament standards and introduce revenue sharing among teams. The problem with WESA[7] is that, whilst an interesting concept with admirable core values, many have raised concerns about its independence, due to its structure[8] and board composition[9].[10]

The early phases of professional leagues and competitions generally take place online and are streamed, usually through platforms like Twitch and YouTube Gaming. Finals of these of competitions tend to move to large arenas or stadia which can cater for mega crowds. By way of recent examples, the League of Legends 2014 World Championship finals took place in a sold out 40,000 seater Olympic Stadium in Seoul, Korea – often considered the home of esports.[11] But even in countries only just embracing the live sports experience the numbers are impressive - the same event in 2016 sold out the Staples Centre in LA 9an arena with a seating capacity of 20,000) within an hour! .

CS:GO events, run by ESL and FACEIT, also regularly pack out arenas. However, although major events are one part of the commercialisation model that esports can compete with vis-a-vis traditional sports, there are certain core differences. Football teams have vast physical fanbases, who attend home stadia, usually on a fortnightly basis, during the season. The fanbase of an esports team is no less passionate, but a little different, mainly because it is a digital fanbase, engaged through digital platforms such as Twitch, rather than through physical presence (or regular physical presence). Yes, fans will be able, on occasion, to watch their team compete at major finals, but there is no “home stadium” concept in esports, as there is in football, and other traditional team sports.

While it is no doubt true that fans that attend live esports events do so for the entertainment and atmosphere, this is not necessarily true of all esports fans. Many fans consume esports content to study the professionals and improve their own skills within the game – which doesn’t require a physical presence at a live event. In fact watching the event live with friends may be detrimental to one attempting to study and learn from the professionals.[12]

Indeed, the concept of home arenas for esports teams is not beyond the realms of possibility. The other interesting differential is that major esports teams can, and do, compete in a number of different leagues and competitions, in relation to the same game title. This is most apparent in CS:GO, where the top teams compete across various major tournaments, including the Esports Championship Series, ESL's Pro League, and the ELeague, a joint venture between IMG/WME and Turner Sports. This is very different to football, and most other traditional team sports, where teams do not readily jump from “domestic league” competition to competition (albeit they can qualify for other leagues through achievements in their domestic league, but this is a very different principle).

Prize money offered by esports leagues and competitions has increased significant in the last two years. The latest International, for Dota 2 was (by some distance) the most lucrative tournament in in esports history, with a reported prize pool of over $20m, with 16 teams and 80 players competing for the $9m+ first prize.[13]

It is important to be aware, however, that a prize pool at this level is not yet the norm. Furthermore, the most extraordinary aspect of the prize pool for the International was not its size; but in its source. Valve, the game publisher, contributed only a fraction of the fund. The balance was sourced from the sales proceeds of downloadable content and tournament guides: in essence, the prize pool was crowdfunded. This draws out an important point in relation to the personal engagement between esports fans and the players.

Media Platforms (Digital and Traditional)

Streaming is at the heart of the esports revolution; in fact, you could construct a robust argument that it is the reason for it.

There have been some fascinating recent stats, provided by Twitch, on its 2015 viewing numbers, including:

241bn minutes of content consumed;

the 2015 International was watched by 32m streaming viewers, putting it second only to the Superbowl;

the 2015 League of Legends World Championship finals (which sold out Berlin’s Mercedes-Benz Arena) drew 35m unique streams, and peaked at 14m concurrent viewers;

In the last 12 months, the esports media proposition has accelerated yet further. Turner Broadcasting, who are behind the ELeague, announced that they will be broadcasting 20 live events on Turner this year with prize money totalling $2.4m. Others, such as Sky Sports and ITV (which both acquired stakes in the dedicated esports broadcaster, GINX TV), Fox Sports, VivendI and the BBC are getting in on the act, demonstrating that whilst esports “made its name” through digital streaming, traditional broadcasters are now taking a genuine interest.

Conversely Premium football matches are broadcast on traditional broadcast channels (and usually on pay-tv subscription platforms), rather than through digital platforms, albeit this is starting to change. Crucially, however, the traditional sports, and in particular football, landscape is built on exclusivity models. The likes of Sky, BT Sport, Sky Italia, BeInSport and Mediaset all pay significant licence fees to exclusively broadcast live football matches, in various competitions including the Premier League, Serie A and Champions League. By way of example, in the UK, Sky and BT paid a combined £5bn for the three-year exclusive live rights for Premier League matches. Esports is still in its infancy in this regard, albeit there is now recognition that building exclusivity around premium content is key to sustained commercial success. That won't be easy, in an industry in which there is already so much content available, on a free or freemium basis. The recent exclusive deal between ESL and YouTube Gaming, however, shows the esports industry is learning lessons from traditional sports and points to a clear direction of travel. Of course, it remains to be seen how the community will react, but just as with football, if the content is good enough; if it is premium, people will be prepared to pay subscription fees.

It is therefore clear that whilst the broadcasting business models for both the established football industry and burgeoning esports sector are still rather diverse, they are undoubtedly converging; and learning from one another. The more mainstream esports becomes, the more likely demand will increase on more traditional platforms, as indeed will exclusive content deals. Similarly, with the digital revolution changing viewing habits and the next generation consuming content on VOD basis through digital and social media platforms[15], traditional sports rights holders are looking to esports as a case study for engaging the “next gen” markets.

Teams

Esports teams are (unsurprisingly) comprised of a number of players. Depending on the game, league and competition, the squad size can vary accordingly. For example, Dota 2 teams have five esports players. Many teams like SK Telecom (LoL and StarCraft), Fnatic (CS:GO, LoL, StarCraft and Dota) and Cloud9 (Dota, Hearthstone, CS:GO and LoL) compete in a range of tournaments across numerous games throughout the world.

Football clubs typically compete in a domestic league with the opportunity for qualification for cross-league cup competitions (like the UEFA Champions League or FIFA World Club Championship). The ability of clubs to play cross-continental fixtures is something relatively novel in traditional sports like football but provides unrivalled exposure for esports teams competing globally. Similarly, recent announcements have confirmed that an eGames competition where teams representing their countries of birth or residence are competing against each other (i.e. an esports World Cup/Olympics). The first tournament of its kind took place in Rio de Janeiro this summer, with similar events planned to take place in South Korea in 2018 and Japan in 2020.

Players that took part in the Rio de Janeiro showcase event are confident that these type of events will further benefit the industry. Larry Lur (a player on the eTeam USA squad) said that "the eGames will do nothing but great things for esports", especially with regard to legitimising it as an industry worth taking an interest in to more casual observers and investors.

Whilst football fans will have little problem in identifying brands such as Real Madrid, Barcelona and Manchester United, esports teams have already developed a fanatical fan base of their own. Optic for example have over 1.2m Twitter followers. Although Evil Geniuses, Newbee, SK Telecom, Fnatic, Invictus Gaming, Team Secret, Cloud9 and MVP may not be household names to the vast majority of readers, Evil Geniuses have competed in over 526 esports tournaments earning almost $12m in the process. The vast majority of its prize money has come through Dota 2 competitions.

By way of comparison, European clubs competing in the elite Champions League 2015/2016 competition earn €12m for qualifying for the group stage, €1.5m per group win, €5.5m for qualifying for the knock-out rounds and €15m for winning €54.5m in performance related prize money excluding additional broadcasting distributions. Barcelona made €36.4m and Juventus earned €30.9m before broadcasting monies were included in their final revenue figures.

Such prize money does not include the various commercial sponsorship opportunities that are also on offer. Whereas football clubs like Liverpool earn significant amounts from participating in the Premier League (£92.7m in 2014-15) they also have multi-million pound apparel deals with Standard Chartered (for £35m per season) and New Balance (for £25m+ per season). This will no doubt be a substantive growth area for aspiring esports teams.

Interesting, it was recently announced[17] that German club Schalke has ventured into the esports space by purchasing a League of Legends Championship Series (LCS) slot from former team, Elements.

Although it was reported[18] that West Ham have signed esports FIFA player Sean Allen to represent the club at tournaments, the Schalke deal is the first football club investing in a team playing in a non-traditional sports esports tournament. This may well signal the start of traditional sports clubs aligning with esports. Indeed, Euroleague basketball[19] is contemplating partnering up with its member clubs to begin an esports Euroleague team competition.

As well as traditional sports clubs investing in teams, individual sports personalities[20] and professional athletes (for example NBA legend Shaquille O’Neal and MLB World Series Champions Jimmy Rollins and Alex Rodriguez) are further reinforcing the notion that traditional sports are indeed aligning themselves with esports.[21]

Players

Players are contracted by teams to participate in particular competitions. Elite players will usually be specialists in one particular game due to the high skill level required. Each game is so complex and nuanced that players can be training at least 12 hours a day for a number of years to reach the top of their chosen industry game. In games like Dota 2 and League of Legends, the particular positions and strategic objectives of the players in a team mean players become specialised in fulfilling set roles within the team.

Esports athletes that compete in elite competition are generally aged around 18 to mid-20s. Whereas playing football as a young child is generally viewed in a positive light to encourage exercise, teamwork and a way of improving interpersonal skills, the clamour for children to play computer games for hours on end even led to the South Korean government to ban u18s from playing computer games between midnight and 8am in 2010![22] Similarly, some have questioned whether playing computer games can be detrimental to young people’s social development and physical and mental wellbeing.

Nonetheless, there are a number of players who are reported to have earned large sums for competing in esports tournaments. Peter “ppd” Dager, Clinton “Fear” Loomis and Saahil "UNiVeRsE" Arora were all reported to have received $1.7m in 2015 for playing for their respective teams mainly because of their 2015 International win.[23] Nonetheless, these figures are dwarfed by reported per week club salaries for football players like Ronaldo (£650,000), Messi (£645,000) and Zlatan Ibrahimovic (£410,000). Just like their teams, there are various commercial opportunities on offer to football players. Top players in the UK for example will have an employment contract with their club for their playing services as well as an image rights deal with their club and various commercial partners so they can monetise their brand through various sponsorship opportunities.

Sponsors and Partners

Brands are expected to spend around $516m in 2017 in esports with $266m targeted in specific sponsorship opportunities.[24] Intel, for example, has been sponsoring esports tournaments for over 10 years (through for example the Intel Extreme Masters). There are a number of commercially savvy esports teams that are already ahead of the curve in exploiting commercial partnership opportunities. As the market matures, such opportunities and propositions will only grow more compelling.

Coke Zero has partnership with Riot Games and the development of the Challenger Series (a series for amateur LoL using the Twitter handle @cokeesports);

Nissan North America has partnered with League of Legends Team, Curse; and

Red Bull has targeted StarCraft 2 and Dota 2 games as well as individual partnerships with esports men and women. Indeed, Cloud9's League of Legends team, is reported to be training out of one of Red Bull's facilities.

Likewise, team Evil Geniuses[26] corporate offering revolves around tiered sponsors with household names like T-Mobile, Monster Energy Drink, and San Disk as can be seen here. Interestingly, Fnatic announced[27] Dafabet (an online casino, poker and betting company) as one of their headline sponsors. With recent controversy surrounding betting, integrity of competitions and insider information, esports teams will be well advised to tread a careful path when it comes to relationships with betting companies.

Sport and Esports similarities

Esports is not a new phenomenon by any means, but part of the reason why the industry has developed quickly over the last few years, is down to technological advancement, in particular in relation to the streaming platforms; advancements which are taking esports to a whole new audience.

The Sheridans Esports Group has been able to team up to help gaming stakeholders from across the esports ecosystem; a combination that allows us to deploy both our knowledge of commercial rights and regulatory frameworks from “traditional sport” with an expertise in the computer games industry. Just as in any sport, team and player contracts need to be drafted; sponsorship and broadcasting agreements negotiated; and regulatory frameworks constructed. In any growth industry, which esports undoubtedly is, as teams mature into sophisticated, multi-faceted organisations, the legal complexities transform accordingly.

That concludes Part 2 of the article. Part 3, which looks at the biggest risks currently facing the industry, will be published in the following weeks. And for those who have not yet read it, Part 1 is available here.

[3] This is an important point and is part of the reason why console games tend to be less relevant as major esports titles because, by the very nature of the business model, fresh versions come out year on year, often with alterations. This helps sell units year on year; but it does not support sustainability as an esports title. Therein lies one of the challenges for publishers: creating esports sustainability does not always sit well with selling more units, year on year. Of course, for free to play PC games such as League of Legends, this is less of an issue.

[5] In the authors’ view, the concept of a ‘governing body’ for esports is a non-starter. Firstly, esports is, as set out in the body of this piece, merely an umbrella term, so in that regard alone it is a misnomer. Secondly, esports is a digitally native industry, with fewer jurisdictional barriers. It needs greater regulation and governance (particularly in relation to integrity matters), yes, but it does not need a ‘one-stop shop’ governing body in the traditional sport sense.

[7] It is interesting to note that WESA's first league commissioner, Pietro Fringuelli, is a former legal advisor to the German Bundesliga. An example of cross pollination between traditional sports and esports, something we believe we will see a lot more over during the coming 12-24 months.

[15] With traditional sports organisations like the NFL and US PGA entering into innovative deals with Twitter, for example.

[16] According to esportsearnings.com. It should be noted that e-“Sports Earnings is a community-driven competitive gaming resource based on freely available public information. The accuracy of this website is dependent on user contributions.”

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Author

Andrew Nixon is a Partner in the Sport Group at Sheridans. Referred to in this year's Legal 500 as a “very bright and talented sports lawyer” Andrew's practice focuses principally on regulatory, governance, disciplinary, arbitration and dispute resolution within the sport sector. Andrew's clients include governing bodies, sports clubs, sports agencies and individual athletes.

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Chris acts for a broad range of clients within the entertainment sectors. He advises clients on a range of commercial issues related, in particular, to the sports and music industries. He has experience acting for musicians, athletes, talent agencies, independent recording and publishing companies and sports governing bodies.

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Tim specialises in advising clients on the various commercial and intellectual property issues, including brand protection and enforcement of intellectual property rights, within the interactive entertainment, digital media and creative sectors.

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